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Double Tax Treaty Denial and the BEPS Multilateral Instrument

Updated: 09 Oct 2017

The European branch of the IBSA held a well-attended meeting at the office of Buren NV in the Hague on Tuesday 3rd October, at which three speakers addressed the issue of double tax treaty denial and the multilateral instrument. The speakers were Roy Saunders, Chairman and Founder of the IBSA & IFS Consultants, Scott Davis, Partner at the US firm of WithumSmith+Brown, and Cees-Frans Greeven, Part-ner of the Dutch law firm Buren NV. Each of the speakers introduced their specific contribution to the topic, after which there was a lively discussion with the audience.

Roy Saunders introduced the subject by commenting on how the international tax environment has significantly changed over the last five years. The principal questions now arising in international discussions concerning taxation are, amongst others, the question of identifying who has the ultimate right to income and what is the principal purpose of a structure or transaction in respect of the income received.

Roy outlined the history of ascertaining the beneficial ownership concept, mentioning such court cases as Aikens Industries, Indofoods, Prevost and others, many of which revolved around the use of Dutch companies within the relevant structures.  He mentioned that the BEPS (“Base Erosion and Profit Shifting”) Action 6 has a big influence on this subject, with the BEPS report recommending the prevention of granting treaty benefits in inappropriate circumstances. The double tax treaties should not be used to create double non-taxation, or the reduction of appropriate taxation through evasion or avoidance.  Treaties should also incorporate a specific limitation of benefits provision and a general anti-abuse rule determining the principal purpose of transactions or arrangements.  Roy then discussed the multilateral instrument (“MLI”), signed in June 2017 by 70 countries, which may amend double tax treaty provisions without individual bilateral negotiations on each treaty.

Scott Davis provided the US views on the current international discussions. According to Scott, the US does not want to participate in the MLI project because the US is of the opinion that it currently has sufficient national anti-abuse legislation to counter the treaty abuse which the MLI also aims to prevent. Furthermore, Scott stated that the current political situation in the US is difficult to forecast changes that may take place in any legislative initiative. He commented on proposed changes in the US, such as the lowering of the corporate income tax (“CIT”) rate to an expected rate of 20%-25%. He also stated that the US is not likely to adopt a value added tax (“VAT”) system such as the European Union currently employs, nor the infamous border tax system initially proposed by President Trump.  With many Republicans as well as Democrats in Congress opposing some of Trump’s proposals, it is difficult to foresee wholesale changes in US tax reform which are badly needed, according to all parties.  And on the topic of double tax treaty denial, Scott feels that the US has an elaborate and specific limitation of benefits provision, and does not intend to develop this further into a general anti-abuse rule such as the subjective Principal Purpose Test.

Cees-Frans Greeven spoke primarily on the proposed changes to the Dutch dividend withholding tax (“DWT”) act, which changes are in line with the BEPS project. The draft bill published only last month introduces an anti-abuse rule in the Dutch DWT act. However, the scope of the DWT exemption, which currently applies to shareholders in EU countries, is broadened to shareholders in countries with which the Netherlands has concluded a double tax treaty. As such it seems that active business structures will benefit from the proposed changes. Structures with intermediate holding companies above the Netherlands will, however, have to comply with new relevant substance requirements, which include, amongst others, a wage cost of €100,000 and adequate office space for at least 24 months. Cees-Frans further clarified that the Netherlands strangely does not have statutory substance requirements for Dutch companies. Only in certain cases, e.g. when an Advance Tax Ruling (“ATR”) is to be acquired, or if a company qualifies as a holding and financing company, may certain substance requirements have to be met. The main rule however is that if a company is incorporated according to Dutch law, it is deemed to be a Dutch tax resident.  Cees-Frans also wondered whether the new provisions, requiring substance in say EU holding companies, are compatible with the freedom of establishment rules of the EU, and moreover whether the non-discrimination rules would be breached in the absence of similar substance requirements for Dutch resident shareholder companies.

Amongst the issues discussed with the audience, with many attendees contributing to the discussions, were:

  • Is the €100,000 wage criterion too strict, especially considering that some businesses, for example holding companies, do not require such wage costs. On the other hand, it was noted that the criterion does provide certainty to taxpayers.

  • Another question related to the principal purpose test. The question arises whether setting up a company to make use of a bilateral investment treaty (“BIT”) also qualifies as a tax reason. The discussion does not provide a clear answer, but suggests that treaty denial may be extended by the principal purpose test to BITs, even though tax may not be a consideration at all (the Netherlands has a wide network of BITs which are useful when structuring investments, and have no specific tax relevance).

  • Another member of the audience asked whether or not the Netherlands has ‘shot itself in the foot’ with the new legislation. Again, the answer was not entirely clear. One attendee stated that the Netherlands is preferable to say Cyprus or Luxembourg, as the Netherlands has a better reputation and much more ‘real industry’ to create the required degree of substance in this new era of business structuring.

  • The question of substance for holding companies was raised, and specifically with regard to the US Limitation of Benefits provision.  With few employees, could a holding company be considered to undertake an ‘actual trade or business’ to meet the relevant provision of the specific clause of each of the US’ treaties?  Scott considered this a possibility if the employees actively managed its US subsidiary, perhaps training its staff, obtaining finance and dealing with the subsidiary’s intellectual property protection.

The discussions were then continued in the bar of Buren N.V. where drinks and canapés were gratefully provided; and with virtually everybody staying to meet each other after the discussion group meeting, the atmosphere was buzzing!